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How to Protect Future Generations Using Tax-Base Restrictions

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  • Antonio Rangel

Abstract

This paper studies how to protect future generations from expropriation and to induce optimal investment in intergenerational public goods (IPGs), by introducing constitutional restrictions on the tax base. The type of tax-base restrictions that we consider places limits on the tax instruments that the government can use to raise revenue, but not on the level of expenditures or debt. We show that the introduction of a constitutional amendment requiring that IPGs and debt be financed with land taxes makes intergenerational expropriation impossible and, for many cases of interest, induces optimal investment in IPGs. We also show that a weaker constitutional amendment requiring that IPGs be financed with land taxes, but imposing no restrictions on how to finance the debt, has a positive impact on IPGs, but not on expropriation. The paper also studies the political feasibility of these reforms. We show that the first reform is not politically feasible since it hurts current generations, but the weaker reform can induce a Pareto improvement.

Suggested Citation

  • Antonio Rangel, 2005. "How to Protect Future Generations Using Tax-Base Restrictions," American Economic Review, American Economic Association, vol. 95(1), pages 314-346, March.
  • Handle: RePEc:aea:aecrev:v:95:y:2005:i:1:p:314-346 Note: DOI: 10.1257/0002828053828527
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    References listed on IDEAS

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    1. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1991. "Generational Accounts: A Meaningful Alternative to Deficit Accounting," NBER Chapters,in: Tax Policy and the Economy, Volume 5, pages 55-110 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Marko Kothenbürger & Panu Poutvaara, 2006. "Social Security Reform and Investment in Education: Is There Scope for a Pareto Improvement?," Economica, London School of Economics and Political Science, vol. 73(290), pages 299-319, May.
    2. Christian A. L. Hilber, 2017. "The Economic Implications of House Price Capitalization: A Synthesis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 45(2), pages 301-339, April.
    3. Hilber, Christian A.L., 2010. "New housing supply and the dilution of social capital," Journal of Urban Economics, Elsevier, vol. 67(3), pages 419-437, May.
    4. Gersbach, Hans, 2009. "Minority voting and public project provision," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 3, pages 1-40.
    5. Marco Bassetto, 2009. "The Research Agenda: Marco Bassetto on the Quantitative Evaluation of Fiscal Policy Rules," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 10(2), April.
    6. Marko Koethenbuerger & Panu Poutvaara, 2009. "Rent taxation and its intertemporal welfare effects in a small open economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(5), pages 697-709, October.
    7. Springer, Job D. & Lusby, Aaron K. & Leatherman, John C. & Featherstone, Allen M., 2007. "Property Tax Lids and the Effect on Kansas," 2007 Annual Meeting, February 4-7, 2007, Mobile, Alabama 34887, Southern Agricultural Economics Association.
    8. Marco Bassetto, 2006. "Politics and Efficiency of Separating Capital and Ordinary Government Budgets," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1167-1210.
    9. Hilber, Christian A. L., 2011. "The economics implications of house price capitalization a survey of an emerging literature," LSE Research Online Documents on Economics 58596, London School of Economics and Political Science, LSE Library.
    10. Parry, Ian W.H., 2007. "Are the costs of reducing greenhouse gases from passenger vehicles negative?," Journal of Urban Economics, Elsevier, vol. 62(2), pages 273-293, September.
    11. Gersbach, Hans & Kleinschmidt, Tobias, 2009. "Power to youth: Designing democracy for long-term well-being," Mathematical Social Sciences, Elsevier, vol. 58(2), pages 158-172, September.

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